Do country risk factors attenuate the effect of taxes on corporate risk-taking?

Arbeitspapier

This study examines whether country-specific risk attenuates the association between tax policies and corporate risk-taking. We define country-specific risk (political and fiscal budget risk) as taxpayer's risk that tax refunds on losses cannot be paid due to the institutional environment or fiscal reasons. We exploit a cross-country panel with 234 changes in corporate tax rates and 49 changes in loss offset rules. We investigate whether government risk-sharing via loss offset rules and tax rates affects risk-taking conditional on country risk. We also examine whether tax rate changes, that scale the risk-sharing effect, influence the propensity to conduct risky projects in different country-level risk environments. Our results suggest that country-level risk fully attenuates the previously documented association between tax policies and corporate risk-taking. It attenuates both the effectiveness of loss offset rules and tax rate changes on corporate risk-taking. While changes in tax policy are attractive to policymakers because alternative instruments to encourage risk-taking cannot as easily be adjusted, we provide significant evidence that country risk considerably limits policymakers' ability to induce firm risk-taking via changes in tax policies.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: arqus Discussion Paper ; No. 235

Classification and Topics

• Classification: Wirtschaft ; Business Taxes and Subsidies including sales and value-added (VAT) ; Fiscal Policies and Behavior of Economic Agents: Firm ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: corporate risk-taking ; country risk ; cross-country study ; fiscal risk ; risky investments

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Osswald, Benjamin ; Sureth, Caren
• Event: Veröffentlichung
• (who): Arbeitskreis Quantitative Steuerlehre (arqus)
• (where): Berlin
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/190984
• Last update: 10.03.2025, 11:42 AM CET